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Unformatted text preview: llowing equations. Note A: Note B: Note C: $37,566 $50,000 $45,027 = = = [$50,000 (1 + i)­3] [$50,000 (1 + i)­3] + {$5,000 [(1 ­ (1+ i)­3) ÷ i]} [$50,000 [(1 + i) ­3] + {$3,000 [(1 ­ (1+ i)­3) ÷ i]} The second way is by trial and error. Plug an interest rate into the equations until the right­hand side of the equation equals the left­hand side. The annual effective interest rate is 10%. b. Interest Expense (Note A) Interest Expense (Note B) Interest Expense (Note C) Year 1 $ 4,502.70d 3,756.60a 4,132.26b 5,000.00 4,545.14c 5,000.00 12,434.00 Year 2 $ 5,000.00 $ 15,000.00 $ 4,652.97e Year 3 4,817.33f $ 13,973.00 Total Interest Expense a $3,756.60 b $4,132.26 c $4,545.14 d $4,502.70 e $4,652.97 f $4,817.33 c. = = = = = = = $ Book Value at Beginning of Period Effective Rate Initial Book Value of $37,566 10% ($37,566 + $3,756.60) 10% ($50,000 – $37,566) – ($3,756.60 + $4,132.26) Initial Book Value of $45,027 10% [$45,027 + ($4,502.70 – $3,000.00)] 10% ($50,000 – $45,027) – ($4,502.70 – $3,000.00) – ($4,652.97 – $3,000.00) + $3,000 Note A Return Year 1 Year 2 Year 3 Total $ $ Expense 4,507.92a 5,048.88b 5,654.73c 15,211.52 Income $ $ 3,756.60 4,132.26 4,545.14 12,434.00 $ $ 751.32 916.61 1,109.59 2,777.52 a $4,507.92 = $37,566 12% b $5,048.87 = ($37,566 + $4,507.92) 12% c $5,654.73 = ($37,566 + $4,507.92 + $5,048.87) 12% P11–5 Concluded Note B Income Year 1 Year 2 Year 3 Total Return $ $ 6,000.00a 6,720.00b 7,526.40c 20,246.40 Expense $ $ 5,000.00 5,000.00 5,000.00 15,000.00 $ $ 1,000.00 1,720.00 2,526.40 5,246.40 a $6,000.00 = $50,000 12% b $6,720.00 = ($50,000 + $6,000) 12% c $7,526.40 = ($50,000 + $6,000 + $6,720) 12% Note C Income Year 1 Year 2 Year 3 Total Return $ $ 5,403.24a 6,051.63b 6,777.82c 18,232.69 a $5,403.24 = $45,027 12% b $6,051.63 = ($45,027 + $5,403.24) 12% Expense $ $ 4,502.70 4,652.97 4,817.33 13,973.00 $ $ 900.54 1,398.66 1,960.49 4,259.69 c $6,777.82 = ($45,027 + $5,403.24 + $6,051.63) 12% d. Total Debt = Current Liabilities as of 12/31/12 + (Long­Term Liabi...
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